Loan monitoring is a method adopted by most banks and financial institutions to ensure that their investments are appropriately protected against loss and other uncertainties.
In the same way, a borrower is afraid of getting scammed by fake loan platforms is the same way lenders are skeptical about offering loans to people to avoid falling into the hands of desperate minds and sharks.
Hence, loan monitoring should be embraced to avert some ugly loan stories.
In the later part of this article, we shall squarely elaborate on loan monitoring. Yes, everything you need to know will be unveiled. Stay tuned and pay close attention.
Overview Of Loan Monitoring
Loan monitoring is a technique used by banks and other financial institutions to ascertain the creditworthiness of a borrower before the approval and issuance of a loan.
There are many reasons why banks and lending platforms engage in loan monitoring; we shall explain them later, but the fundamental reason is to ensure that the borrower is capable of repaying or refinancing the loan when due.
Most of these financial institutions have standards or profiles that they expect every loan applicant to attain. They have laid down requirements and criteria for checking borrowers’ eligibility.
Also, these requirements help to check how healthy the income or finance of the borrower is and whether it can sustain within the stipulated loan tenure. Hence, the need for account statements, cash flow, and even balance sheets.
Furthermore, some lenders may proceed to enact some laws and regulations in the form of terms and conditions to ensure that there is no investment loss. Conditions like; no property acquisition, key management changes, and even asset disposal. This is mainly for complex loans.
As a borrower, we advise that you carefully go through the terms and conditions of each loan before proceeding to apply for loans.
In addition, most banks and other financial institutions may demand you regularly visit the bank. This way, they can track the progress of the business and reassure themselves of your ability to repay or refinance your loans.
What Are The Importance Of Loan Monitoring?
So far, we believe you have clearly understood what loan monitoring is all about. However, the burning question is this “why is loan monitoring important?”
Below are the answers to that question. Pay close attention.
To Protect Their Interest
Every financial institution seeks to protect its interest in every transaction. While borrowers view the loan as “help” banks see it as an investment. Hence, they strive to protect their investment through loan monitoring.
To Detect Red Flags
Through loan monitoring, banks and lending platforms can find loopholes from the borrower and proffer solutions to them. This could be the inability to repay loans or not having a reliable source of income. With this red flag, they can terminate the loan application.
To Avoid Losses
With loan monitoring, banks can easily protect their investment against possible losses in the hands of money squanderers and unfaithful fellows.
In fact, this is the ultimate reason for loan monitoring.
To Protect The Image And Standard Of The Institution
Loan monitoring ensures that the bank’s standards are maintained and the image protected.
This is because any daint on the reputation of the organization will affect the running and progress of the bank in the future.
The 5 C’s Of Lending/ Credit
Regarding loan monitoring, different tactics are employed to determine the borrower’s creditworthiness. The 5 C’s is one of them. This way, the credit profile of the borrower is assessed. The 5 C’s of credit or lending are;
- Character
- Capacity
- Capital
- Conditions
- Collateral.
As a borrower, we advise that you carefully understand each “C,” how they affect your chances of obtaining loans, and how the lenders assess them.
Keep reading; we will explain further below:
Character
Character is the first on our list. Talking about the character, we emphasize mainly financially than morality. Your ability to repay loans and also maintain a stable business and good credit score.
This can be assessed by thoroughly doing a background check on your credit reports and scores.
To improve your character, ensure that you repay your debts on time and leave lasting impressions on lenders.
Capacity
The next of the 5 C’s is capacity—this hinges on your ability to repay your loan. Your cash flow calculates your capacity. That is, the amount of income and expenditures made.
A borrower’s capacity is measured by evaluating the past and present cash flow and ascertaining if the borrower can repay the loan when due.
Therefore, to be safer, we advise you to try as much as possible to increase your income and reduce your expenses.
Capital
Capital does not limit to the money you have invested in your business only, and it also extends to the money you wish to borrow. How much have you invested, and how much are you trying to invest?
Lenders assess your capital by carefully examining how far you have grown with the money you have invested and how you hope to invest the one you are obtaining.
Again, they look at your investments and the dividends received from them.
To improve your capital and increase your chances of getting your desired loan, make wise investments and draft out practical means of utilizing the loan when granted.
Conditions
Conditions and terms are great ways to avoid losses. Banks have terms and conditions that help them avert heavy-risk businesses and organizations.
Always ensure that there is enough cash flow before seeking for loans to avoid denial or rejection.
Collateral
Collateral is any asset that one gives as a security. On default, the financial institution can sell off the asset to recover its loan.
Any loan obtained with collateral is termed “a secured” loan. Hence, we advise you to check the market price and depreciation rate of your collateral before giving it out.
Challenges Of Loan Monitoring
Collecting, reviewing, and analyzing information are the works of banks. They deploy some tools to help carry out effective and efficient work.
However, there are some challenges faced by banks and other financial institutions in terms of loan monitoring, and they are covenant monitoring (information) and (periodic reviewing).
Financial institutions should embrace technology to help reduce the burden of loan monitoring. This, to a great extent, helps in preventing losses and stress in the process.
Conclusion
Loan monitoring is an excellent process of tracking a loan until it is repaid. Lenders use this technique to ensure that their investments and interests are protected.
As a borrower, you must ensure that you are on the safer side before opting for a loan which is hence why we listed the 5 C’s of lending.
We believe that this article has been helpful. We encourage you to use the comments section to share your thoughts and if you have questions, feel free to ask them. We shall respond swiftly.
